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Ten Money-Losing Assumptions in Assisted Living: Part 2

November 1, 2001
by Lynette Jones, RN, PhD
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Carrying through from September's Part 1, still more "bad ideas" and what to do about them.
            Assisted living has grown into a $14 billion industry as financiers poured millions of dollars into building an infrastructure for the "graying of America." Yet operating costs for assisted living organizations have climbed exponentially and competition has grown significantly. Now assisted living organizations often exceed their budgets and fail to produce an adequate margin. For investors, earnings ratios have suffered and stock prices have, at best, been sluggish.

In the September 2001 issue of Nursing Homes/Long Term Care Management ("Ten Money-Losing Assumptions in Assisted Living: Part 1"), I reviewed ways that information shortfalls, based on unwarranted assumptions, can lead to financial distress in the typical assisted living project. We started with five such assumptions (Table), and here are five more:

Assumption #6: Poor Quality Does Not Affect the Bottom Line

Quality problems in assisted living can be defined, at a minimum, as services scheduled but not provided, services provided poorly and services provided to the wrong resident. Most assisted living organizations have staff who train other employees and monitor the quality of services delivered. Historically, these staff have been limited to conducting retrospective reviews of records and making incident reports. Usually variations in quality are not identified until long after they have occurred.

For example, when a resident is scheduled for incontinence brief changes and they do not happen as frequently as needed, the resident's skin begins to erode and breakdown occurs rapidly. The resident develops a skin wound and, as it grows, mobility becomes painful. As a result, the resident begins to require additional staff time to perform activities of daily living (ADLs). The resident also has an increase in care needs and begins using two hours per day of staff time. This costs the organization $140 per week in labor time.

Further costs develop in this scenario. Medications must be ordered at a cost of $100. Depending on regulations and organizational policy, the resident might require a transfer, perhaps in an ambulance. This costs the organization $500. The labor cost in preparing a resident for a transfer usually consumes about three hours of staff time. Multiple documents and forms must be completed. The execution and coordination of all these activities consumes numerous hours of staff time, much of which is licensed nursing time. Let's assume the licensed nursing time is 10 hours, costing $200 in labor time. After this occurs, quality assurance staff spend four hours reviewing the paperwork on the incident, costing another $100.

So far, this quality problem has cost $1,070-and the family is a very unsatisfied customer.

Let's not forget that while staff are dealing with this crisis, other residents are probably not getting the care they normally require, thereby incurring still more quality problems.

In a 100-resident community, even if you assume that quality problems arise with only 5% of your residents, the cost of these problems would be at least $5,350 per year. If you own 50 properties, this 5% quality problem is costing you $267,500 per year. Preventing quality problems is the only way to avoid these costs. By monitoring quality proactively, organizations can avoid the pitfalls that accompany adverse changes in resident health status.

Any monitoring system you use should facilitate the ongoing analysis of cost versus benefits of services provided, i.e., the services should be monitored against resident benefits or outcomes. All services have a point of diminishing returns, at which time they no longer provide additional benefit or the benefit is not worth the cost. Providing them beyond this point is a sure money loser.

Assumption # 7: Labor Is a Fixed Cost

Some organizations simply allocate care staff to their properties based on the size of the property. Meanwhile, assisted living organizations are competing for residents in an environment of increasing service amenities. Assuming such services are not outsourced, the more services offered, the more labor costs will vary, and these variable costs usually comprise more than 80% of the organization's budget. More importantly, these are variables that operators can "play with" to improve their bottom lines.

Let's consider a few examples. What happens when a resident or several residents experience a decline in health and there is no commensurate increase in staffing? If two residents in a 100-bed community require an increase in care of three hours per day, where does this care time come from? When labor is considered a fixed cost, there is no budget to meet such changes in resident care needs. Instead, too often increases in some residents' care needs mean that other residents don't receive the care they need and are paying for.

Assisted living organizations without a plan for adjusting staff as care needs change are at very high risk for quality problems. Such organizations should be monitoring their resident outcomes very closely to prove that their staffing model is supporting and not harming residents. Conversely, when labor is considered a fixed cost per facility, and resident care needs are low, is staffing decreased accordingly? If not, the organization is incurring unnecessary expenses.